Case Note & Summary
The Supreme Court considered an appeal by the Board of Trustees for the Port of Calcutta against an arbitral award granting interest pendente lite to the contractor, Engineers-De-Space-Age. The dispute arose from a port contract which contained Clause 13(g), stating that no claim for interest would be entertained by the Commissioners with respect to money or balances in their hands owing to any dispute or delay in making interim or final payment. The arbitrator awarded interest pendente lite despite this clause, and the Board challenged the award, arguing that the clause constituted an absolute prohibition against payment of interest for delayed payments and that the arbitrator had acted beyond the contract. Special leave was initially granted on 7 November 1994 on the premise that the question of interest pendente lite by an arbitrator was referred to a three-judge Bench, but later it was clarified that the reference concerned interest for the period prior to the arbitrator entering upon the reference, not post-reference interest. The Court therefore recalled that part of the order and decided the case on merits. The appellant relied on Associated Engineering Co. v. Government of Andhra Pradesh to argue that an arbitrator must act in terms of the contract and cannot travel beyond it. The Court examined the Constitution Bench decision in Secretary, Irrigation Department, Government of Orissa v. G.C. Roy, which held that ordinarily a person deprived of money to which he is legitimately entitled has a right to be compensated, and interest pendente lite is not a matter of substantive law. The Constitution Bench also held that an arbitrator, as an alternative forum for dispute resolution, must have the power to award interest pendente lite where the agreement does not prohibit such grant, to avoid multiplicity of proceedings. Interpreting Clause 13(g) strictly, the Court found that the clause only prohibited the Commissioner from entertaining interest claims and did not prohibit the arbitrator from awarding interest once the matter was in arbitration. The Court further held that even if the clause were construed to bar interest, the question of its interpretation fell within the arbitrator's jurisdiction, and the arbitrator did not wander outside the contract. Accordingly, the appeal was dismissed, upholding the arbitral award of interest pendente lite.
Headnote
A) Arbitration Law - Arbitrator's Power to Award Interest Pendente Lite - Where agreement is silent, arbitrator has power to award interest pendente lite based on principle of Section 34 CPC - Arbitration Act, 1940, Section 3, Section 41; Code of Civil Procedure, 1908, Section 34 - The Constitution Bench in Secretary, Irrigation Department, Government of Orissa & Others v. G.C. Roy held that a person deprived of use of money to which he is legitimately entitled has a right to be compensated; arbitrator as alternative forum must have power to award interest to avoid multiplicity of proceedings; interest pendente lite is not a matter of substantive law. Held that arbitrator can award interest pendente lite when contract does not prohibit and a claim is made (Paras 4-5). B) Contract Interpretation - Strict Construction of Interest Prohibition Clauses - Clause prohibiting Commissioner from entertaining interest claims does not bar arbitrator from awarding interest pendente lite - Port contract Clause 13(g) - Clause 13(g) stated that no claim for interest will be entertained by the Commissioners; the Court strictly construed it, holding that it only precludes the Commissioner from paying interest, not the arbitrator; once the matter goes to arbitration, the arbitrator's discretion remains. Held that the arbitrator was not prohibited by the clause and the award was justified (Paras 5-6). C) Arbitral Jurisdiction - Scope of Arbitrator's Authority and Contract Interpretation - Arbitrator's interpretation of contract clause within jurisdiction; not exceeding terms - Arbitration Act, 1940 - Even if the clause could be read to bar interest, the question of its interpretation fell within the arbitrator's jurisdiction; the arbitrator did not travel beyond the contract in deciding whether the clause prohibited interest; reliance on Associated Engineering Co. paras 26 and 29 did not help as the arbitrator was within jurisdiction. Held that the arbitrator had jurisdiction to award interest pendente lite (Para 6).
Issue of Consideration
Whether Clause 13(g) of the contract prohibited the Arbitrator from awarding interest pendente lite, and whether the Arbitrator exceeded his jurisdiction in awarding such interest despite the contractual clause.
Final Decision
Appeal dismissed. The Supreme Court held that Clause 13(g) only prohibited the Commissioner from entertaining interest claims and did not bar the arbitrator from awarding interest pendente lite. The arbitrator was within his jurisdiction in awarding interest pendente lite.
Law Points
- Arbitrator has power to award interest pendente lite where agreement is silent
- interest pendente lite is not a matter of substantive law
- contractual clause prohibiting Commissioner from entertaining interest claims does not prohibit arbitrator
- strict construction of interest prohibition clauses
- arbitrator is creature of agreement but must act in accordance with law and contract
- arbitrator's interpretation of contract clause within jurisdiction
- Section 34 CPC principle applies to arbitration
